bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

10 MONETARY ECONOMICS
The only reason why this might not be possible stems from the lack of
spending resources as we have defined them above. After all, a person borrowing
from a bank takes it for granted that the loan will come in a form
that allows him or her to spend. Thus, the lack of ‘money’ does not except
for very short periods constrain individual demand for goods and services
and the microeconomic demand for money has little economic significance.
1.3 Money in the aggregate
Of course, it might be argued that if I borrow money from someone else,
this is part of the total stock of money currently available in the economy as
a whole. Then, as long as we assume that the total supply of money is temporarily
fixed, we could conceive of a situation in which the supply does not
match the current demand for money. But this introduces the important
question of what determines the aggregate supply of money — is it fixed or,
at least controllable by the monetary authorities, or might ‘money’ in the
aggregate be created by the actions of people in the economy seeking to borrow
and to spend? We look at this issue in detail in Chapters 3, 4 and 11.
For the moment, let us assume that the aggregate supply of money is
temporarily fixed or that it is growing at a predetermined rate. Then, an
unanticipated increase in the demand for goods and services, and the consequent
increase in the demand for money to allow the additional desired
exchanges to take place, might produce a shortage of money in the aggregate.
What does this mean at an individual level? Clearly, those who hold
cash or bank deposits will not be immediately affected. Again, there is no
physical shortage of notes and coin since these are supplied by the central
bank and the mint on demand in exchange for deposits. The shortage, thus,
takes the form of bank deposits not growing sufficiently rapidly. Since, as
we shall see in Section 3.2, bank deposits are created when banks make
loans, the shortage arises through banks being unwilling or unable to meet
fully the increased borrowing requirements of consumers at existing interest
rates. In this situation, two broad outcomes are possible.
Firstly, the price of borrowing (the interest rate) might rise. This would
overcome the shortage if, and only if, the increase in interest rates persuaded
people to borrow less and hence to spend less. That is, we are introducing
an additional constraint on aggregate expenditure within the ability to
borrow: the willingness to borrow. This willingness is tempered by the cost
of borrowing. It would also be possible for the authorities to seek to restrict
borrowing (credit) in other ways, such as imposing minimum repayment
amounts. This is clear enough, but the situation is complicated by the story
being told in two, apparently conflicting ways. The first sees the monetary